Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

3 . The lessee's lease analysis Consider the case of Mitata Company: Mitata Company is considering the purchase of new manufacturing equipment that will cost

3. The lessee's lease analysis
Consider the case of Mitata Company:
Mitata Company is considering the purchase of new manufacturing equipment that will cost $15,000(including shipping and installation). Mitata can take out a four-year, $15,000 loan to pay for the equipment at an interest rate of 3.60%. The loan and purchase agreements will also contain the following provisions:
The annual maintenance expense for the equipment is expected to be $150.
The equipment has a four-year depreciable life. The Modified Accelerated Cost Recovery Systems (MACRS) depreciation rates for a three-year asset are 33.33%,44.45%,14.81%, and 7.41%, respectively.
The corporate tax rate for Mitata is 40%.
(Note: Mitata Company is allowed to take a full-year depreciation tax-saving deduction in the first year.)
Note: (Note: Do not round intermediate calculations.)
Based on the preceding information, complete the following tables:
Value
Annual loan payment will be: $4,093.47
Annual tax savings from maintenance will be: $66
Year 1
Year 2
Year 3
Year 4
Tax savings from depreciation $2,667
Net cash flow
Thus, the net present value (NPV) cost of owning the asset will be:
-$9,082
$11,594
-$9,582
-$21,203
Mitata Company has been offered an operating lease on the same equipment. The four-year lease requires end-of-year payments of $600, and the firm will have the option to buy the asset in four years for $3,300. The firm will want to use the equipment longer than four years, so it plans to exercise this option. All maintenance will be provided by the lessor. What is the NPV cost of leasing the asset?
-$4,395
$13,965
-$1,035
-$5,494
Should Mitata lease or buy the equipment?
Buy
Lease

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

How Finance Works

Authors: Mihir Desai

1st Edition

1633696707, 978-1633696709

More Books

Students also viewed these Finance questions

Question

Why are reversing entries helpful?

Answered: 1 week ago